Increasing Global Scrutiny on Executive Compensation

According to a piece in the Financial Times (7/22, Hall, Daneshkhu), France’s Minister of Economic Affairs, Industry and Employment Christine Lagarde has declared that banks that have once again started paying guaranteed bonuses to staff are an “absolute disgrace.”

French banks have “agreed to link bonuses to the profitability of the bank and include clawback provisions.” Anticipating the G20 Summit in September, Lagarde is urging other governments to also mandate curbs on executive pay practices that encourage excessive risk taking. Similar sentiments are being echoed elsewhere throughout Europe, with the UK Financial Services Authority recently warning that “banks that have agreed to guarantee executive bonuses for more than a year” are at risk of incurring “heavy penalties.”

Hoping to discourage risky (and excessive) executive pay schemes — the G20 intends to promote international regulatory standards that would require boards of directors to play a more active role in the design, consideration and evaluation of executive comp plans – including the structure of guaranteed bonuses. The intention is to give shareholders and other stakeholders the tools and information they need to closely monitor and track executive compensation in a timely manner – and to avoid the same types of public executive comp foibles we’ve seen in recent years.

Will the G20 succeed in creating international regulatory standards that restrict executive compensation practices? Will those restrictions preserve shareholder value, or will they push talent out of the executive marketplace?  We’ll have to wait to find that out. In the meanwhile, one thing is for certain — shareholders, legislators and regulators will continue to examine, question and scrutinize executive comp plans with increasing vigilance — making thoughtful self regulation the best way to go for smart executives and directors.